Indonesia unveils emergency fiscal package to revive confidence

August 23, 2013 12:19 pm

Indonesia unveils emergency fiscal package to revive confidence

JAKARTA, August 23 – Indonesia’s government unveiled an emergency fiscal package on Friday to promote foreign investment, reduce imports and prop up itstumbling rupiah currency, as it struggles to revive confidence in southeast Asia’s largest economy. The intervention follows a punishing week for emerging markets, with currencies from Brazil to India shaken by fears of higher global borrowing costs and a reduction in cheap cash from the US.Indonesia faces threats on multiple fronts: from rising inflation to falling demand and prices for its top exports – from coal to tin and palm oil. Foreign portfolio investment is shrinking and foreign direct investment is falling, as has Chinese demand for the country’s commodities.

In 2012, Indonesia had its first trade deficit in modern times, and it will probably have a significantly bigger one this year.

Hatta Rajasa, chief economic minister, said the package aimed to strengthen Indonesia’s troubled current account, the sum of its trade balance and investment income, after a near-record $9.8bn deficit in the second quarter.

Import taxes on luxury goods such as cars, private planes and yachts will be increased, Mr Rajasa said. Measures will be taken to reduce oil imports and remove export quotas on mineral and metal ores, steps that could help mend the trade balance.

The government will also provide tax incentives for labour-intensive industries. The central bank also unveiled measures on Friday, including an easing in restrictions to ensure banks and exporters have access to ample US dollar liquidity.

Economists said the plan could help narrow a current account deficit that has turned the rupiah into one of Asia’s worst-performing currencies and left the country exposed to an expected withdrawal of US super-loose monetary policy. The rupiah is down 11 per cent against the dollar this year.

“We reckon that the policies announced will help the persistent [deficit]” said Bharti Bhargava, a foreign exchange analyst with Forecast Pte in Singapore. “Imports are likely to come down with the increase in import taxes on luxury products such as cars.”

Indonesian markets were not impressed with the steps.

The benchmark index, which was up as much as 1.6 per cent early Friday before the announcements, ended the day down 0.04 per cent. For the week, it lost 8.7 per cent – making this the worst week since mid-September 2011, when it plunged 10.7 per cent.

The rupiah, which hit a fresh four-year low of 10,830 to the dollar ahead of the announcements, rose 0.3 per cent afterward to 10,770.

The Indonesian currency has fallen 10.6 per cent against the dollar this year with a 3.6 per cent loss this week, according to Thomson Reuters data. Government bonds, meanwhile, ended mostly flat.

Emerging markets have been jolted this week, with the Indian rupee hitting record lows and Indonesia’s stock market and currency plunging. Fears that Malaysia and Thailand could join that club have pushed their currencies to multi-month lows in recent days, raising concern market contagion could spread to economically healthier countries in southeast Asia.

In a sign of the difficulties ahead, Indonesia’s central bank projected on Friday that the annual inflation rate could exceed 8.9 per cent in August, the highest since January 2009 and above July’s already-bracing 8.61 per cent. Inflation should return to normal in September and consumer prices may fall in October, the government said.

High inflation has made it difficult for President Susilo Bambang Yudhoyono to rely on a growing consumer class to offset weak exports, as prices rise for everything from fuel to beef.

Chatib Basri, finance minister, said the government now expects the economy to grow 5.9-6.0 per cent this year, down from a previous target of 6.3 per cent. Growth in the second quarter of 5.8 per cent was the slowest since 2010.

Chua Hak Bin, economist at Bank of America Merrill Lynch in Singapore, said most of Friday’s measures looked more medium- and long-term, such as tax incentives and simplifying permits. “The near-term impact on the current-account deficit from these measures is less clear,” he said.